JOSHUA RONEN, New York University - Department of Accounting, Taxation & Business Law
Email: jronen@stern.nyu.edu

Rule l0b-5 of the 1934 Securities and Exchange Act allows investors to sue firmsfor misrepresentation or omission. Since firms are principal-agent contracts between owners contract designers - and privately informed managers, owners are the ultimate firms' voluntary disclosure strategists. We analyze voluntary disclosure equilibrium in a game with two types of owners: expected liquidating dividends motivated (VMO) and expected price motivated (PMO). We find that Rule l0b-5: (i) does not deter misrepresentation and may suppress voluntarydisclosure or, (ii) induces some firms to adopt a partial disclosure policy of disclosing only bad news or only good news.

DENNIS R. OSWALD, University of Michigan - Ross School of Business
Email: denniso@bus.umich.edu
PAUL ZAROWIN, New York University - Department of Accounting, Taxation & Business Law
Email: pzarowin@stern.nyu.edu

This paper presents both a new approach to studying the consequences of accounting choice and a unique sample to examine the effects of accounting choice in the R&D context. We investigate the effect of firms decision to capitalize R&D expenditures on the amount of information about future earnings reflected in current stock returns, as captured by the association between current-year returns and future earnings (FERC). We use a sample of U.K. firms, which includes both R&D capitalizers and expensers. An important feature of our tests is our use of a two equation system to control for the endogeneity of the accounting choice (i.e., self selection). Proponents of capitalization claim that it enables management to better communicate information about the success of projects and their probable future benefits. Consistent with this, we find that capitalization is associated with higher FERC than expensing.

ROBERT TUMARKIN, Mezzacappa Management, LLC
Email: FAJ@AIMR.ORG
ROBERT WHITELAW, New York University, National Bureau of Economic Research (NBER)
Email: rwhitela@stern.nyu.edu

This paper examines the relationships between internet message-board activity and abnormal stock returns and between internet message-board activity and abnormal trading volume.This study focuses on RagingBull.com and internet service sector stocks. I choose RagingBull.com because its format enables me to measure investor opinion objectively. I find that on days with abnormally high message activity changes in investor opinion correlate with with abnormal industry-adjusted returns. Additionally, days with abnormally high message activity coincide with abnormally high trading volume both that day and the following day. However, I find that, in general, message-board activity does not predict industry-adjusted returns or abnormal trading volume.

TARCISIO DA GRACA, Cornell University - Department of Economics
Email: tbdg@yahoo.com

Some claim that the event-study methodology literature is "mature". But the overlooked IVWA-based test is more powerful than conventional tests. Its implementation requires the same inputs as the traditional test. Its functional form yields the power improvement. Using CRSP monthly data for 1944-1971 and 1980-2006, simulations indicate that IVWA-based test correctly rejects the null hypothesis substantially more frequently than the traditional test. Its superiority seems more pronounced over 1980-2006. This casts doubts over previous event-studies that failed to reject the null. They may have done so incorrectly due to lack of statistical power. Their reevaluation under IVWA-based test is advisable.

IGNACIO VELEZ-PAREJA, Universidad Tecnologica de Bolivar
Email: ivelez@unitecnologica.edu.co
MARIANO GERMAN MERLO, Universidad de Belgrano
Email: mmerlo@ub.edu.ar
DAVID ANDRES LONDONO BEDOYA, Universidad Tecnologica de Bolivar
Email: Londono.Bedoya@economia.uniroma2.it
JULIO ALEJANDRO SARMIENTO, Pontifical University Javeriana Inicio
Email: sarmien@javeriana.edu.co

Based on a theoretically correct model we examine the value the market assigns to different components of the cash flow to equity including potential dividends. We study publicly traded firms from five Latin American countries: Argentina, Brazil, Chile, Mexico and Peru during the period 1991-2007. The model includes the following variables: market value of equity, dividends paid, change in equity investment and change in cash and cash equivalent holdings (potential dividends). These variables are regressed with actual equity value as dependent variable and the other variables as independent variables (including equity value for next period). We tested the data applying Ordinary Least Squares OLS, and Data Panel. Both tests give consistent results.

The contribution of this work is double: First, against current findings, we find that the market assigns less than one dollar to a future dollar for any of the variables studied as expected when we interpret the coefficient of the variables as discount factors. Second, in particular, we found that potential dividends (change in liquid assets) destroy value. This means that the value today of a dollar in t 1 is negative. This conclusion confirms the problem of agency costs of keeping undistributed cash flows and that they should not be included in the cash flows while listed in the Balance Sheet. The solution to the problem of destroying value is not inflating the cash flows, but making decisions to effectively distribute the excess cash.

TODD FELDMAN, affiliation not provided to SSRN
Email: todd@primal.ucdavis.edu
DANIEL FRIEDMAN, University of California, Santa Cruz - Department of Economics, CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
Email: dan@cats.ucsc.edu

We introduce human traders into an agent based financial market simulation prone to bubbles and crashes. We find that human traders earn lower profits overall than do the simulated agents (robots) but earn higher profits in the most crash-intensive periods. Inexperienced human traders tend to destabilize the smaller (10 trader) markets, but otherwise they have little impact on bubbles and crashes in larger (30 trader) markets and when they are more experienced. Humans' buying and selling choices respond to the payoff gradient in a manner similar to the robot algorithm. Likewise, following losses, humans' choices shift towards faster selling. There are problems in properly identifying fundamentalist and trend-following strategies in our data.

GREGORY A. KROHN, Bucknell University - Department of Economics
Email: krohn@bucknell.edu
WILLIAM R. GRUVER, Bucknell University - Department of Management
Email: gruver@bucknell.edu

Sparked by rising defaults on subprime mortgages, the financial turmoil of 2007 and 2008 threatened the stability of the worldwide financial system and led to unprecedented interventions in financial markets by central banks and other governmental institutions. This essay describes and explains the complexities of the financial turmoil of 2007 and 2008 for students of the financial system so that they might understand better how problems in the mortgage market led to the possibility of collapse of the financial system and the controversial actions taken by the Federal Reserve and other governmental entities. We draw several lessons about the behavior of financial markets and financial regulation from this historic episode.